Fri, Feb 07, 2014 - Page 9 News List

Despite fears of decline, US standard of living rising

As the world’s No. 1 economy stuggles to recover, statisticians are predicting a sharp fall in real per capita GDP, but even these figures show that a child born today will on average have an income 60 percent higher than their parents did

By Martin Feldstein

Illustration: Mountain People

The near-term outlook for the US economy has improved, owing to the sharp increase in household wealth last year, together with the end of the fiscal drag caused by the increase in tax rates in 2012. The US now has a chance to raise real (inflation-adjusted) per capita GDP faster than the feeble 1.7 percent average rate recorded during the four years since growth resumed in the summer of 2009.

Of course, significantly faster GDP growth this year is not guaranteed. For starters, achieving it requires overcoming the negative impact of the jump in long-term interest rates that followed the US Federal Reserve’s announcement in June last year that it would likely end its asset purchase program this year.

Moreover, the cloud of rising budget deficits at the end of the decade — and exploding national debt after that — is also discouraging investment and consumer spending.

So what happens if one looks beyond this year and asks what will happen to US economic growth over the longer term? The US Congressional Budget Office projects that real per capita GDP growth will slow from an annual rate of 2.1 percent in the 40 years before the start of the recent recession to just 1.6 percent between 2023 and 2088. The primary reason for the projected slowdown is the decrease in employment relative to the population, which reflects the aging of US society, a lower birth rate and a decelerating rise in women’s participation in the labor force. While the number of people working on average increased by 1.6 percent per year from 1970 to 2010, the office forecasts that the rate of annual employment growth will fall to just 0.4 percent in the coming decades.

A drop in annual growth of real per capita GDP from 2.1 percent to 1.6 percent looks like a substantial decline, but even if these figures are taken at face value as an indication of future living standards, they do not support the common worry that the children of today’s generation will not be as well off as their parents. An annual per capita growth rate of 1.6 percent means that a child born today will have a real income that is on average 60 percent higher at age 30 than the what his or her parents earned at the same age.

Of course, not everyone will experience the average rate of growth. Some will outperform the average 60 percent rise over the next three decades and some will not reach that level.

However, a 30-year-old in 2044 who experiences only half the average growth rate will still have a real income that is nearly 30 percent higher than the average this year — and things are even better than those numbers imply.

Although US government statisticians do their best to gauge the rise in real GDP through time, there are two problems that are very difficult to overcome in measuring real incomes: increases in the quality of goods and services and the introduction of new ones. These problems cause the official measure of real GDP growth to understate the true growth of the standard of living that real GDP is supposed to indicate.

Consider the problem of accounting for quality improvements. If a person pays the same price for some product or service this year as they did last year, but the quality of the product or service is better, their standard of living has increased. The same is true if the price rises, but the quality increases even more. Unfortunately, a government statistician cannot judge the increase in quality of everything from restaurant meals to medical care.

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